Governor Brown says that Proposition 64 eliminates the mandate that would require local permits for cannabis industry licenses - unless local government has its own permitting system or a local ban in place.

Regulating the Vallejo Cannabis Industry

Introduction

Vallejo is sitting on a rare opportunity to set the standard and become the model for an industry in the early stages of explosive growth. The nascent cannabis industry, which voters approved for adult use in November, will finally be fully regulated by the State of California beginning in 2018. Some of our residents will reflexively ask: “Do we really want Vallejo to become known as the pot capital of Solano county?” The answer is a resounding yes. Yes we do, and not just Solano county. Of course we won’t market ourselves that way - any more than Napa markets itself as the booze capital. What Napa has done so successfully with branding the local wine industry we can do here in Vallejo with the cannabis industry, and both can benefit from proximity to each other.

This will now be a State-regulated and legal marketplace. The economic incentives to fully embrace the new economic realities are tremendous. Local jurisdictions enlightened enough to integrate and encourage all facets of the industry will prosper at the expense of those slow to come to grips with the economic, political, and social ramifications of the long overdue end of prohibition. A window of opportunity has opened that offers the chance to lay the local groundwork for the biggest growth industry in sight. A comprehensive set of local cannabis industry regulations will best serve the interests of City finance, public safety, and community economic development.

It’s useful to look at the existing landscape and remember where we’ve been in deciding where we want to go. Local political support for the cannabis industry runs broad and deep. Measure C, which authorized a tax on Vallejo dispensaries, passed by more than a three to one margin six years ago, and public opinion has been moving in favor of legalization ever since. But instead of partnering with the dispensaries, our City government has treated them with a toxic combination of open hostility and neglect. Many of the dispensary operators have persevered and continue to make a significant contribution to the City’s bottom line, with two million dollars in Measure C taxes paid in last year. These dispensaries currently operate in a legal grey zone, unable to move or expand their facilities because they are officially regarded as illegal in every municipal zoning district.

The variety of products being manufactured and sold in dispensaries has undergone a remarkable transformation in the decades since California first authorized the use of medical cannabis. New applications and product formulations continue to emerge, including medical applications for extractions and concentrates with no psychoactive effects. The level of production devoted to the existing authorized medical market has been significant and growing rapidly. In a twelve month period ending March of 2016, the 2, 756 medical cannabis dispensaries in California garnered $845 million in retail sales. While the distribution of these products is regulated to some degree through the dispensaries, their production is not.

The immense quantity of raw plant material that feeds into these retail products as well as supplying the extensive black market under prohibition has all been produced in clandestine agricultural operations, either outdoors or indoors under lights. Concentrates are often produced with volatile solvents using homemade equipment, and product manufacturing operations commonly fly under the radar without inspections for quality control. All of this economic activity is currently going on all across Vallejo, without licensing, safety inspections, or taxation, as a direct result of failed public policy. It’s time to abandon quasi-legalities and piecemeal approaches and lay a solid foundation for the growth of an industry with unrivaled opportunity to benefit a community that is badly in need of an economic infusion.

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Vallejo has historically suffered the lowest rated pavement in Solano County and an aging water system that is breaking down. A regulated and prosperous cannabis industry can help fund City services and infrastructure.

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Setting Regulatory Goals

Any good plan begins with first principles and a clear idea of what the execution aims to accomplish. We might begin by asking; What are some of the ways the community might benefit from a comprehensive local regulatory framework for the cannabis industry? Here are some suggestions in no particular order:

Economic Development - Sensible regulation of the industry can foster the creation of living wage jobs for Vallejo residents and maximize opportunities for local entrepreneurs.

Public Safety - Regulation can address concerns with product safety like pesticide or solvent residue, and minimize hazards like electrical fires in production facilities or environmental degradation from outdoor agriculture.

Increase City Services to Residents - The taxes and fees will help support local government services with funds previously circulating in a black market.

Crime Reduction - Regulation offers the opportunity to realize a win/win by channeling economic activity formerly run as criminal operations into legal businesses that can now help fund law enforcement, and help improve police/community relations by normalizing the cannabis industry and ending prohibition.

Social Justice - Prohibition is a failed public policy that has severely impacted the lives of many local residents caught up in a senseless ‘war on drugs,’ with the consequences falling most heavily on the poor and communities of color. Regulation will offer the opportunity to redress past mistakes and prevent future injustice.

Broadly then, we want to maximize job creation for local residents and extend the economic benefits to low income and communities of color. We want to maximize the revenue generated by the industry to enhance City services while promoting public safety and effective community policing. From these general goals we can begin to develop approaches to codify in a comprehensive regulatory framework.

Developing Strategies

The tandem goals to create jobs and fund City services both rely on increasing the overall level of economic activity. The greatest economic benefit derives from destination businesses able to draw purchasers in from outside the City limits to leave some of their dollars behind at local retail outlets. Our dispensaries are firmly established and geographically well-positioned to serve in that capacity. With a fully legitimized and integrated cannabis industry it isn’t hard to imagine a well developed tourism component that would feature various aspects of the production process and local products.

There will be a strong inclination to overtax the industry and throttle the golden goose, and we can see local jurisdictions around the state succumbing to that temptation. Becoming a destination will depend in large part on building a reputation for variety, quality, and - most importantly - the price of the products offered on our dispensary shelves. The Measure C taxes have already been set at the maximum of ten percent of gross sales authorized by the initiative, on top of the normal sales tax of around eight percent. With the State poised to add another fifteen percent on top of local taxes, we are very clearly in the range where excess taxation will suppress economic activity, or worse, drive it back into a black market and undercut all of the goals we just talked about.

To get a handle on the question of a proper level of fees and taxes that will both enhance job creation and maximize overall revenues to the City, we need to look at the provisions in the coming State regulations. With the passage of the adult use act in November the situation got a bit more complicated. The State will now impose an additional fifteen percent excise tax on the privilege of purchasing retail cannabis products. That money will be used to fund a number of programs, some of which Vallejo should seek to get back in the form of grants. The fifteen percent tax applies to all sales, medical and non-medical, but the adult use act dropped the sales tax on medical cannabis entirely.

If the dispensaries are given permits and State licenses with the current Measure C maximum tax rate still in place, it will leave Vallejo at a disadvantage relative to neighboring jurisdictions. There’s no real justification for such a punitive level of taxation, and it clearly will work against the goals of maximizing legal job creation and increased funding for City services. We need to wean the industry from a long-established black market, and jacking up prices in the legal market is the wrong approach entirely. The best all around strategy will be to hold fees and excise taxes to the minimum required to cover regulatory costs to the City, and work to promote the industry and increase sales tax revenue. Holding down retail prices is key to becoming known as a shopping destination, and the benefits will ripple across the entire local business community.

The other primary means of maximizing the economic benefit will be to fully integrate the local industry to produce local products that return as much of the purchase price to Vallejo businesses as possible, and encourage production for larger markets outside the City. The State is currently in the process of creating a comprehensive licensing system for the various facets of the industry. Local jurisdictions have the opportunity to pass ordinances that complement the State system and allow local entrepreneurs to smoothly license and permit their businesses. The State classification of license types reflects the legislative sausage-making process that created it, resulting in a dozen different types of cultivation licenses.

Here's a flow chart illustrating how a vertically integrated cannabis industry would function with the various proposed State license types.

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Material Flow through a State-licensed cannbis industry production and distribution system

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Agriculture in Vallejo - Returning to the City's Roots

Vallejo is blessed with a unique combination of geography and environment, a surplus of open space, and a mild climate with ample sunshine. The City was originally founded on a base of agriculture and ranching. The California Farmer and Journal of Useful Sciences in 1863 had this to say about the Vallejo area: “...a farm of twenty, thirty, or forty acres of this rich land will yield more than 500 acres of some mud that is worked in many parts of our country.” Integrating licensed commercial cannabis cultivation into the economic mix would reach back to the City’s agricultural roots.

As shown in the chart, the State cultivation licenses can be grouped by the type of lighting used in the growing process - entirely indoor, outdoor, or mixed as in a greenhouse operation with supplemental lighting. Businesses operating under those dozen types of State cultivation licenses will generate the raw material that supplies the rest of the industry, as well as some of the end products for retail sale. The more of that production that occurs in Vallejo the better for the local industry as a whole in terms of cost, convenience, and branding. The State also intends to impose excise taxes on cannabis cultivation at the rate of $9.25 per ounce for flowers and $2.25 per ounce for leaf material.

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Growing indoors at Canada's first publically traded cannabis production company

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Clandestine cannabis cultivation has been taking place across the City for many years under prohibition. All those products that have been sold in our dispensaries over the years came from somewhere, and a good portion came from right here in Vallejo. To meet the goal to maximize job creation and broaden the reach of the economic benefits, a local regulatory system should be structured to encourage existing producers to become licensed growers. The late addition of Type 1C cottage industry licenses appears to be an effort by the State to allow small scale and niche producers to participate in the marketplace.

The overriding need for concealment under prohibition largely dictated cultivation methods and pushed most production indoors in urban areas, which offers the most complete control over the environment but at considerable cost in energy requirements. There will be a strong tendency to continue to give the requirement for security the same weight when thinking about licensing cannabis cultivation. While theft prevention is always a consideration for relatively high dollar agricultural crops like avocados or raisins, the level of concern with cannabis under State regulation will be much less than in the past. With the State track and trace program working, stolen material will not be able to enter the legal market, and successful strategies to regulate the cannabis black market out of existence will ultimately be the most effective theft deterrent. Prudent measures like fencing and heightened security during the harvest window would be an appropriate level of response to those concerns, as it is in conventional agriculture for relatively high value crops.

Growing outdoors in containers

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Removing the imperative for concealment opens up new options for cultivation, and growing cannabis is similar to other commercial flower crops. It would be easy to dismiss seasonal outdoor cropping in the City limits as impractical, but exposure to the open sky is really the limiting factor, and even paved lots can be converted to container growing. The opportunity to construct new greenhouse range presents another promising option. All that is required is open space like we find on North Mare Island and elsewhere around town. In areas where contaminated soil from industrial use might be an issue, the ground can simply be sealed and capped without affecting the operation. Many modern crop production systems do not rely on putting plants in the ground. This is an image from a cannabis greenhouse production business in Monterey county where outdoor growing is currently banned, but is permitted in greenhouses.

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Permitted greenhouse growing in Monterey County

Opportunities in Manufacturing

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Given the genetic variety and corresponding chemical makeup of the plant material in circulation, the importance of the role played by the Type 4 licensed cutting/clone production in standardizing the quality of the source material becomes apparent. A dependable supply of locally-produced raw material of consistent quality will encourage local entrepreneurial talent to take full advantage of the new State manufacturing licenses. Our proximity to a major regional market allows easy access to a broader customer base outside the City for products manufactured here. That market is expanding rapidly as new products and applications develop and adult use becomes legal.

The Type 6 manufacturing licenses include various extraction operations to concentrate active ingredients without using volatile solvents, as well as the use of concentrates in the production of a rapidly expanding universe of retail products. Concentrates serve as both consumable end products in themselves and the basis for edible and topical formulations. The active ingredients in cannabis flowers are contained in resins growing on stalked structures on the plant surface, and resin will not dissolve in water. The resinous structures can be dislodged and screened, either dry or in an ice bath. The plant material can also be heat-pressed to isolate the resins, and commercial scale extraction equipment that uses carbon dioxide under pressure as a solvent is widely used. Oil or butter infusions are also common in formulations for topical and edible cannabis products.

First impressions of the Type 7 manufacturing licenses involving volatile solvents have been colored by activities conducted under prohibition. Cannabis resins will dissolve in solvents like alcohols and infuse into fats and oils. Efficient extractions of essential oils and resins using industrial solvents such as hexane are common in the food, biodiesel and cosmetics industries. Commercial equipment off the shelf cycles these solvents safely in a closed system under trained management. The clandestine home version of volatile extraction often involves running butane through open-ended tubes, risking explosive and catastrophic combustion. Spurred by the growing demand for these products, this kind of activity has been going on all over town. Public safety is a powerful argument for filling that demand through licensed and inspected facilities, as well as laboratory testing under Type 8 licensing of the final products to make sure solvent residues have been properly purged.

Partnering with Dispensaries

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Our current regulatory framework substitutes the illusion of control for common sense. Vallejo dispensaries have been relegated to a legal twilight zone where the City declares them illegal in every zone under municipal code, but with 'limited immunity' from prosecution. This situation leaves operators unable to plan for expansion or relocate their businesses. The current level of taxation under Measure C is punitive, and will discourage a broader customer base from outside the City and bolster the black market. It's about to become much worse with the State slapping on new excise taxes. Any regulatory framework for the industry must begin with the recognition of the critical role our dispensaries play as the interface between the local industry and the public. That means treating them as partners instead of pariahs.

Dispensaries need use permits and approved zoning districts like any other business, and zero tolerance for competing businesses attempting to operate without licensing, inspections, or taxation. The fees and use taxes on dispensary sales should be held near the minimum required to fund enforcement of the regulatory standards, while concentrating on maximizing the overall level of economic activity and sales tax revenue. The differential State application of excise and sales taxes among medical and non-medical sales will need to be taken into account when determining appropriate specific levels of local taxation. We have a well established distribution base with experienced operators, and we should be making every effort to capitalize on that advantage.

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The end of prohibition and the conversion of a massive black market economy into legal and regulated commerce represents a generational opportunity on the scale of the dot com boom in the nineties. This could be a game changer for the communities willing to seize this opportunity and lay the regulatory foundation for an integrated and prosperous industry. Nowhere in the region is the need for economic revitalization or the availability of resources greater than right here in Vallejo.